During the second quarter of 2016, the Fund continued to raise and invest capital. We now own positions in five different non-traded REITs. These were acquired through secondary market purchases at an average cost of 75% of the respective REITs’ reported NAV. At the end of the quarter, we were also holding a cash position of 17.6% of our total assets. While holding this cash creates some drag on earnings, we believe that patience will be rewarded and we prefer to invest opportunistically as names we like become available at an attractive price. This being an illiquid market, the timing of good investment opportunities can be unpredictable.
The Fund is focused on exploiting market inefficiencies, so our strategy is driven more by the availability of these opportunities than by overall market conditions. Market conditions are nevertheless important as they will affect the exit prices at which our REIT investments can liquidate their properties.
After experiencing a modest decline in early 2016, commercial real estate prices have resumed their upward trend. The Green Street CPPI index increased by 1% in June and has increased by 2.5% YTD for 2016. Net absorption of office and industrial space was also positive, with nearly 0.5% of the available stock absorbed during Q2 2016. We expect the positive absorption to support modest price gains for the remainder of 2016.
During the second quarter we added to our existing positions. These investments continue to reflect our strategy of investing in REITs that are actively considering or pursuing an exit strategy. In some cases, this involves a liquidation of assets, while in others the company is being repositioned for a merger or public listing. We have analyzed several new REITs that we would like to acquire, but we have not yet seen opportunities to do so at a compelling price.
One of the positions that we added to is Strategic Realty Trust, a small REIT with a $125 million in assets. We acquired a modest position in this REIT in Q1, and it is now our second largest investment. SRT’s management was taken over by Glenborough in 2013, and the company is being repositioned to focus primarily on urban retail properties, rather than the more generic suburban strip centers that the REIT has previously invested in. So far in 2016 they have acquired five properties in infill locations in San Francisco and Los Angeles. While these properties produce lower current returns than their suburban counterparts, they have far more upside in value, and they should increase the company’s appeal to a potential acquirer, or to investors in a listed REIT.
Another new position, Highlands REIT, was created through the spin-off of InvenTrust’s non-core assets. This position accounts for only 3% of the Fund’s assets. The REIT’s objective is to liquidate its assets. Since these assets are inherently illiquid and difficult to sell, we expect the process to take several years.
What We Have Not Bought
Sometimes what you don’t buy is as important as what you do buy. REITs that trade at low prices are not necessarily cheap. Here are some examples of investments we have chosen to avoid:
REITs backed by risky and illiquid property types such as ski resorts and water parks. These properties are very difficult to value and they have lots of operating leverage – meaning that a small change in revenues can lead to a big change in net income.
REITs managed by sponsors who have abandoned this business or who have rebranded to try to distance themselves from their abysmal track record.
REITs that are still early in their life cycle and do not have a clear exit strategy in sight.
The chart below represents the portfolio composition grouped by property type. At the end of this quarter, retail became the largest segment of the portfolio, which accounts for 35.17% of the portfolio. Office was the next largest property type, at 26.01%.
The Fund’s REIT investments have been purchased at an average price of 75% of each REIT’s reported NAV, and the average annualized dividend rate was 5.14% of the purchase price.
Key Characteristics of REIT Investments
|Average Purchase Price to NAV Ratio||74.74%|
|Average Current Dividend Rate||5.14%|
Q2 2016 Distributions
For the second quarter, the Fund will issue its first distribution equal to 0.75% of your invested amount, which is equivalent to a 3.0% distribution rate on an annualized basis. We expect to gradually increase our distributions to the targeted range of 4.0% to 5.0% as the fund’s capital is fully invested. As of 6/30/2016, 17.6% of our assets were in cash and some of our investments have not been paying dividends for a full quarter, so the dividends earned by the Fund were not yet sufficient to support the targeted distributions.
CAPFUNDR recently launched its second fund, the CAPFUNDR Hamilton Multifamily Fund. This fund intends to generate a combination of high current income and capital appreciation by acquiring apartment properties in Midwestern markets that benefit from attractive cap rates and stable demand. This fund will be managed by a partnership between CAPFUNDR and Hamilton Real Estate Capital. Hamilton is an experienced multifamily investor whose three previous funds have produced an average IRR of 28.6%. You can view more details in the Offerings section of our website.
Your trust and support are much appreciated. Please feel free to contact us through www.capfundr.com if you have any questions.